LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The following table presents loans receivable as of December 31, 2017 and 2016:



	December 31,
	2017			2016
(amounts in thousands)
Commercial
Multi-family	$	3,502,381		$	3,214,999
Commercial and industrial (includes owner occupied commercial real estate)	1,633,818			1,382,343
Commercial real estate non-owner occupied	1,218,719			1,193,715
Construction	85,393			64,789
Total commercial loans	6,440,311			5,855,846
Consumer
Residential real estate	234,090			193,502
Manufactured housing	90,227			101,730
Other	3,547			3,483
Total consumer loans	327,864			298,715
Total loans receivable	6,768,175			6,154,561
Deferred costs and unamortized premiums, net	83			76
Allowance for loan losses	(38,015		)	(37,315		)
Loans receivable, net of allowance for loan losses	$	6,730,243		$	6,117,322

Included in December 31, 2016 loans receivable balances above are $11.5 million of commercial and industrial loans and $0.7 million of other consumer loans that were previously classified as held for sale at December 31, 2016 and have been reclassified to held and used to conform with the current period presentation.

The following tables summarize loans receivable by loan type and performance status as of December 31, 2017 and 2016:



	December 31, 2017
	30-89 Days Past Due (1)		90 Or More Days Past Due (1)		Total Past Due Still Accruing (1)		Non- Accrual		Current (2)		Purchased Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Multi-family	$	4,900	$	—	$	4,900	$	—	$	3,495,600	$	1,881	$	3,502,381
Commercial and industrial	103		—		103		17,392		1,130,831		764		1,149,090
Commercial real estate - owner occupied	202		—		202		1,453		472,501		10,572		484,728
Commercial real estate - non-owner occupied	93		—		93		160		1,213,216		5,250		1,218,719
Construction	—		—		—		—		85,393		—		85,393
Residential real estate	7,628		—		7,628		5,420		215,361		5,681		234,090
Manufactured housing (5)	4,028		2,743		6,771		1,959		78,946		2,551		90,227
Other consumer	116		—		116		31		3,184		216		3,547
Total	$	17,070	$	2,743	$	19,813	$	26,415	$	6,695,032	$	26,915	$	6,768,175



	December 31, 2016
	30-89 Days Past Due (1)		90 Or More Days Past Due (1)		Total Past Due Still Accruing (1)		Non- Accrual		Current (2)		Purchased- Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Multi-family	$	12,573	$	—	$	12,573	$	—	$	3,200,322	$	2,104	$	3,214,999
Commercial and industrial	350		—		350		8,443		978,881		1,037		988,711
Commercial real estate - owner occupied	137		—		137		2,039		379,227		12,229		393,632
Commercial real estate - non-owner occupied	—		—		—		2,057		1,185,331		6,327		1,193,715
Construction	—		—		—		—		64,789		—		64,789
Residential real estate	4,417		—		4,417		2,959		178,559		7,567		193,502
Manufactured housing (5)	3,761		2,813		6,574		2,236		89,850		3,070		101,730
Other consumer	12		—		12		58		3,177		236		3,483
Total	$	21,250	$	2,813	$	24,063	$	17,792	$	6,080,136	$	32,570	$	6,154,561


(1)	Includes past-due loans that are accruing interest because collection is considered probable.


(2)	Loans where next payment due is less than 30 days from the report date.

(3)

Purchased credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past-due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit-impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and Customers recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable and are reported as performing loans.


(4)	Amounts exclude deferred costs and fees, unamortized premiums and unaccreted discounts and the allowance for loan losses.


(5)	Manufactured housing loans purchased in 2010 are supported by cash reserves held at Customers that are used to fund past-due payments when the loan becomes 90 days or more delinquent. Subsequent purchases are subject to varying provisions in the event of borrowers’ delinquencies.

As of December 31, 2017 and 2016, Customers had $0.3 million and $0.5 million, respectively, of residential real estate recorded in Other real estate owned in the consolidated balance sheets. As of December 31, 2017 and 2016, the Bank had initiated foreclosure proceedings on $1.6 million and $0.4 million, respectively, in loans secured by residential real estate.

Allowance for Loan Losses

The changes in the allowance for loan losses for the years ended December 31, 2017 and 2016, and the loans and allowance for loan losses by loan type based on impairment-evaluation method are presented in the tables below. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans for periods prior to the termination of the FDIC loss sharing arrangements.



Twelve Months Ended December 31, 2017	Multi-family		Commercial and Industrial			Commercial Real Estate Owner Occupied			Commercial Real Estate Non-Owner Occupied			Construction			Residential Real Estate			Manufactured Housing			Other Consumer			Total
(amounts in thousands)
Allowance for loan losses
Ending Balance, December 31, 2016	$	11,602	$	11,050		$	2,183		$	7,894		$	840		$	3,342		$	286		$	118		$	37,315
Charge-offs	—		(4,157		)	(731		)	(486		)	—			(415		)	—			(1,338		)	(7,127		)
Recoveries	—		676			9			—			164			72			—			138			1,059
Provision for loan losses	566		3,349			1,771			29			(25		)	(70		)	(106		)	1,254			6,768
Ending Balance, December 31, 2017	$	12,168	$	10,918		$	3,232		$	7,437		$	979		$	2,929		$	180		$	172		$	38,015
Loans
Individually evaluated for impairment	$	—	$	17,461		$	1,448		$	160		$	—		$	9,247		$	10,089		$	30		$	38,435
Collectively evaluated for impairment	3,500,500		1,130,865			472,708			1,213,309			85,393			219,162			77,587			3,301			6,702,825
Loans acquired with credit deterioration	1,881		764			10,572			5,250			—			5,681			2,551			216			26,915
	$	3,502,381	$	1,149,090		$	484,728		$	1,218,719		$	85,393		$	234,090		$	90,227		$	3,547		$	6,768,175
Allowance for loan losses
Individually evaluated for impairment	$	—	$	650		$	642		$	—		$	—		$	155		$	4		$	—		$	1,451
Collectively evaluated for impairment	12,168		9,804			2,580			4,630			979			2,177			82			117			32,537
Loans acquired with credit deterioration	—		464			10			2,807			—			597			94			55			4,027
	$	12,168	$	10,918		$	3,232		$	7,437		$	979		$	2,929		$	180		$	172		$	38,015



Twelve Months Ended December 31, 2016	Multi-family			Commercial and Industrial			Commercial Real Estate Owner Occupied			Commercial Real Estate Non-Owner Occupied			Construction			Residential Real Estate			Manufactured Housing			Other Consumer			Total
(amounts in thousands)
Allowance for loan losses
Ending Balance, December 31, 2015	$	12,016		$	8,864		$	1,348		$	8,420		$	1,074		$	3,298		$	494		$	133		$	35,647
Charge-offs	—			(2,920		)	(27		)	(140		)	—			(493		)	—			(825		)	(4,405		)
Recoveries	—			381			—			130			1,854			367			—			11			2,743
Provision for loan losses	(414		)	4,725			862			(516		)	(2,088		)	170			(208		)	799			3,330
Ending Balance, December 31, 2016	$	11,602		$	11,050		$	2,183		$	7,894		$	840		$	3,342		$	286		$	118		$	37,315
Loans
Individually evaluated for impairment	$	—		$	8,516		$	2,050		$	2,151		$	—		$	6,972		$	9,665		$	57		$	29,411
Collectively evaluated for impairment	3,212,895			979,158			379,353			1,185,237			64,789			178,963			88,995			3,190			6,092,580
Loans acquired with credit deterioration	2,104			1,037			12,229			6,327			—			7,567			3,070			236			32,570
	$	3,214,999		$	988,711		$	393,632		$	1,193,715		$	64,789		$	193,502		$	101,730		$	3,483		$	6,154,561
Allowance for loan losses
Individually evaluated for impairment	$	—		$	1,024		$	287		$	14		$	—		$	35		$	—		$	—		$	1,360
Collectively evaluated for impairment	11,602			9,686			1,896			4,626			772			2,414			88			60			31,144
Loans acquired with credit deterioration	—			340			—			3,254			68			893			198			58			4,811
	$	11,602		$	11,050		$	2,183		$	7,894		$	840		$	3,342		$	286		$	118		$	37,315

Certain manufactured housing loans were purchased in August 2010. A portion of the purchase price may be used to reimburse Customers under the specified terms in the purchase agreement for defaults of the underlying borrower and other specified items. At December 31, 2017 and 2016, funds available for reimbursement, if necessary, were $0.6 million and $1.0 million, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio.

Loans Individually Evaluated for Impairment

The following tables present the recorded investment (net of charge-offs), unpaid principal balance and related allowance by loan type for impaired loans that are individually evaluated for impairment as of December 31, 2017 and 2016, and the average recorded investment and interest income recognized for the years ended December 31, 2017, 2016 and 2015. Purchased credit-impaired loans are considered to be performing and are not included in the tables below.



	December 31, 2017						Twelve Months Ended December 31, 2017
	Recorded Investment Net of Charge Offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no recorded allowance
Commercial and industrial	$	9,138	$	9,287	$	—	$	8,865	$	214
Commercial real estate - owner occupied	806		806		—		1,439		70
Commercial real estate - non-owner occupied	160		272		—		898		2
Other consumer	30		30		—		51		—
Residential real estate	3,628		3,801		—		4,617		24
Manufactured housing	9,865		9,865		—		10,003		558
With an allowance recorded
Commercial and industrial	8,323		8,506		650		5,984		230
Commercial real estate - owner occupied	642		642		642		882		—
Residential real estate	5,619		5,656		155		3,307		187
Manufactured housing	224		224		4		131		8
Total	$	38,435	$	39,089	$	1,451	$	36,177	$	1,293



	December 31, 2016						Twelve Months Ended December 31, 2016				Twelve Months Ended December 31, 2015
	Recorded Investment Net of Charge Offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no recorded allowance
Multi-family	$	—	$	—	$	—	$	964	$	53	$	267	$	24
Commercial and industrial	2,396		3,430		—		15,424		804		8,543		891
Commercial real estate - owner occupied	1,210		1,210		—		7,963		426		6,526		454
Commercial real estate - non-owner occupied	2,002		2,114				5,265		155		6,605		648
Construction	—		—		—		—		—		749		—
Other consumer	57		57		—		47		—		42		1
Residential real estate	6,682		6,749		—		4,567		120		2,254		86
Manufactured housing	9,665		9,665		—		8,961		465		5,433		368
With an allowance recorded
Multi-family	—		—		—		232		—		—		—
Commercial and industrial	6,120		6,120		1,024		7,028		436		9,331		191
Commercial real estate - owner occupied	840		840		287		173		—		15		1
Commercial real estate - non-owner occupied	149		204		14		380		—		817		12
Other consumer	—		—		—		29		—		83		—
Residential real estate	290		303		35		395		—		426		2
Total	$	29,411	$	30,692	$	1,360	$	51,428	$	2,459	$	41,091	$	2,678

Troubled Debt Restructurings

At December 31, 2017, 2016 and 2015, there were $20.4 million, $16.4 million and $11.4 million, respectively, in loans categorized as troubled debt restructurings (“TDRs”). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accruing status if the borrower satisfies a minimum six-month performance requirement; however, the TDR will remain classified as impaired. Generally, the Customers requires sustained performance for nine months before returning a TDR to accruing status. Modifications of purchased credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards for purchased credit-impaired loans do not result in the removal of these loans from the pool even if the modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not considered TDRs.

The following table presents total TDRs based on loan type and accrual status at December 31, 2017, 2016, and 2015. Nonaccrual TDRs are included in the reported amount of total non-accrual loans.



	December 31,
	2017						2016						2015
	Accruing TDRs		Nonaccrual TDRs		Total		Accruing TDRs		Nonaccrual TDRs		Total		Accruing TDRs		Nonaccrual TDRs		Total
(amounts in thousands)
Commercial and industrial	$	63	$	5,939	$	6,002	$	73	$	146	$	219	$	27	$	518	$	545
Commercial real estate owner occupied	—		—		—		12		—		12		—		—		—
Commercial real estate non-owner occupied	—		—		—		—		1,945		1,945		—		204		204
Manufactured housing	8,130		1,766		9,896		7,429		2,072		9,501		5,911		2,389		8,300
Residential real estate	3,828		703		4,531		4,012		707		4,719		2,332		61		2,393
Total TDRs	$	12,021	$	8,408	$	20,429	$	11,526	$	4,870	$	16,396	$	8,270	$	3,172	$	11,442

The following table presents loans modified in a troubled debt restructuring by type of concession for the years ended December 31, 2017, 2016 and 2015. There were no modifications that involved forgiveness of debt.



	For the Years Ended December 31,
	2017			2016			2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Extensions of maturity	5	$	6,497	3	$	1,995	1	$	183
Interest-rate reductions	35	1,574		61	4,621		161	7,274
Total	40	$	8,071	64	$	6,616	162	$	7,457

The following table provides, by loan type, the number of loans modified in troubled debt restructurings and the related recorded investment for the years ended December 31, 2017, 2016 and 2015.



	For the Years Ended December 31,
	2017			2016			2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Commercial and industrial	4	$	6,437	1	$	76	3	$	791
Commercial real estate non-owner occupied	—	—		1	1,844		1	211
Manufactured housing	36	1,634		58	2,286		156	6,251
Residential real estate	—	—		4	2,410		2	204
Total loans	40	$	8,071	64	$	6,616	162	$	7,457

As of December 31, 2017, except for one commercial and industrial loan with an outstanding commitment of $2.1 million, there were no other commitments to lend additional funds to debtors whose loans have been modified in TDRs. There were no commitments to lend additional funds to debtors whose terms had been modified in TDRs at December 31, 2016 and 2015, respectively.

As of December 31, 2017, five manufactured housing loans totaling $0.2 million that were modified in troubled debt restructurings within the past twelve months defaulted on payments. As of December 31, 2016, eight manufactured housing loans totaling $0.2 million, one commercial real estate non-owner occupied loan of $1.8 million and one residential real estate loan of $0.1 million that had been modified in troubled debt restructurings within the past twelve months defaulted on payments. As of December 31, 2015, eleven manufactured housing loans totaling $0.3 million that had been modified in troubled debt restructurings within the past 12 months defaulted on payments.

Loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those that have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. For the year ended December 31, 2017, there was one allowance recorded as a result of TDR modifications totaling $1 thousand for one manufactured housing loan. There were no allowances recorded as a result of TDR modifications during 2016. There were three allowances recorded as a result of TDR modifications during 2015 totaling $0.2 million for two commercial and industrial loans, and $0.1 million for one commercial real estate non-owner occupied loan.

Purchased Credit-Impaired Loans

The changes in accretable yield related to purchased credit-impaired loans for the years ended December 31, 2017, 2016 and 2015,

were as follows:



	For the Years Ended December 31,
	2017			2016			2015
(amounts in thousands)
Accretable yield balance as of December 31,	$	10,202		$	12,947		$	17,606
Accretion to interest income	(1,673		)	(3,760		)	(2,299		)
Reclassification from nonaccretable difference and disposals, net	(704		)	1,015			(2,360		)
Accretable yield balance as of December 31,	$	7,825		$	10,202		$	12,947

Allowance for Loan Losses and the FDIC Loss Sharing Receivable and Clawback Liability

In 2010, Customers acquired certain loans pursuant to FDIC-assisted transactions in which losses from resolution of the nonperforming loans were eligible for partial reimbursement by the FDIC ("covered loans"). Subsequent to the purchase date, the expected cash flows on the covered loans were subject to evaluation. Decreases in the present value of expected cash flows on the covered loans were recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC loss sharing receivable balance was increased reflecting an estimated future collection from the FDIC, which was recorded as a reduction to the provision for loan losses. If the expected cash flows on the covered loans increased such that a previously recorded impairment could be reversed, Customers recorded a reduction in the allowance for loan losses (with a related credit to the provision for loan losses) accompanied by a reduction in the FDIC loss sharing receivable balance (with a related charge to the provision for loan losses). Increases in expected cash flows on covered loans and decreases in expected cash flows from the FDIC loss sharing receivable, when there were no previously recorded impairments, were considered together and recognized over the remaining life of the loans as interest income. Decreases in the valuations of other real estate owned covered by the loss sharing agreements were recorded net of the estimated FDIC receivable as an increase to other real estate owned expense (a component of non-interest expense).

As part of the FDIC loss sharing agreements, Customers also assumed a potential liability to be paid within 45 days subsequent to the maturity or termination of the loss sharing agreements that was contingent upon actual losses incurred over the life of the agreements relative to the expected losses and the consideration paid upon acquisition of the failed institutions (the "Clawback liability"). Due to cash receipts on the covered assets in excess of the original expectations of the FDIC, Customers anticipated that it would be required to pay an amount to the FDIC at the end of the loss sharing agreements.

Customers presented the FDIC Loss Sharing Receivable, net of the Clawback liability on the consolidated balance sheets. In the event the Clawback liability exceeded the FDIC Loss Sharing Receivable balance, the net liability amount was presented in "Accrued interest payable and other liabilities" on the consolidated balance sheets.

On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered assets through September 30, 2015, adjusted for cash payments to and cash receipts from the FDIC as part of the December 31, 2015 and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets pursuant to the loss sharing agreements were no longer presented as covered assets as of June 30, 2016.

The following table presents changes in the allowance for loans losses and the FDIC loss sharing receivable, including the effect of the estimated Clawback liability for the years ended December 31, 2017, 2016 and 2015.



	Allowance for Loan Losses For the Years Ended December 31,
	2017			2016			2015
(amounts in thousands)
Ending balance as of December 31,	$	37,315		$	35,647		$	30,932
Provision for loan losses (1)	6,768			3,330			16,694
Charge-offs	(7,127		)	(4,405		)	(13,412		)
Recoveries	1,059			2,743			1,433
Ending balance as of December 31,	$	38,015		$	37,315		$	35,647



	FDIC Loss Sharing Receivable For the Years Ended December 31,
	2017		2016			2015
(amounts in thousands)
Ending balance as of December 31,	$	—	$	(2,083	)	$	2,320
Increased (decreased) estimated cash flows (2)	—		289			(3,872		)
Increased estimated cash flows from covered OREO (a)	—		—			3,138
Other activity, net (b)	—		(255		)	248
Cash payments to (receipts from) the FDIC	—		2,049			(3,917		)
Ending balance as of December 31,	$	—	$	—		$	(2,083	)

(1) Provision for loan losses	$	6,768	$	3,330		$	16,694
(2) Effect attributable to FDIC loss sharing agreements	—		(289		)	3,872
Net amount reported as provision for loan losses	$	6,768	$	3,041		$	20,566

(a) Recorded as a reduction to Other real estate owned expense (a component of non-interest expense).

(b) Includes external costs, such as legal fees, real estate taxes and appraisal expenses, that qualified for reimbursement under the loss sharing agreements.

Credit Quality Indicators

Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate and construction loans are rated based on an internally assigned risk rating system which is assigned at the time of loan origination and reviewed on a periodic, or on an “as needed” basis. Residential real estate loans, manufactured housing and other consumer loans are evaluated based on the payment activity of the loan.

To facilitate the monitoring of credit quality within the multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, construction and residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective loan portfolio class, Customers utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans.

The risk rating grades are defined as follows:

“1” – Pass/Excellent

Loans rated 1 represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.

“2” – Pass/Superior

Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, are virtually immune to local economies and are in stable growing industries. The management team is well respected, and the company has ready access to public markets.

“3” – Pass/Strong

Loans rated 3 are those loans for which the borrowers have above average financial condition and flexibility, more than satisfactory debt service coverage, balance sheet and operating ratios that are consistent with or better than industry peers, operations in industries with little risk, movement in diversified markets and experience and competency in their industry. These borrowers’ access to capital markets is limited mostly to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.

“4” – Pass/Good

Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher-grade borrower. These loans carry a normal level of risk with very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher-quality loans.

“5” – Satisfactory

Loans rated 5 are extended to borrowers who are determined to be a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management or limited access to alternative financing sources. The borrower’s historical financial information may indicate erratic performance; but current trends are positive, and the quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher-grade loans. If adverse circumstances arise, the impact on the borrower may be significant.

“6” – Satisfactory/Bankable with Care

Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally intact. These borrowers may exhibit declining financial characteristics with increasing leverage and decreasing liquidity and may have limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness and eroding profit margins.

“7” – Special Mention

Loans rated 7 are credit facilities that may have potential developing weaknesses and deserve extra attention from the account manager and other management personnel. In the event potential weaknesses are not corrected or mitigated, deterioration in the ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or problems are clearly evident are graded in the category below.

“8” – Substandard

Loans are classified 8 when the loans are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the company will sustain some loss if the weaknesses are not corrected.

“9” – Doubtful

Customers assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

“10” – Loss

Customers assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not warranted. Amounts classified as loss are immediately charged off.

Risk ratings are not established for consumer loans, including residential real estate, home equity, manufactured housing and installment loans, mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based upon aggregate payment history through the monitoring of delinquency levels and trends and are classified as performing and non-performing.

The following table presents the credit ratings as of December 31, 2017 and 2016, for the loans receivable portfolio.



	December 31, 2017
	Multi-family		Commercial and Industrial		Commercial Real Estate Owner Occupied		Commercial Real Estate Non-Owner Occupied		Construction		Residential Real Estate		Manufactured Housing		Other Consumer		Total
(amounts in thousands)
Pass/Satisfactory	$	3,438,554	$	1,118,889	$	471,826	$	1,185,933	$	85,393	$	—	$	—	$	—	$	6,300,595
Special Mention	53,873		7,652		5,987		31,767		—		—		—		—		99,279
Substandard	9,954		22,549		6,915		1,019		—		—		—		—		40,437
Performing (1)	—		—		—		—		—		221,042		81,497		3,400		305,939
Non-performing (2)	—		—		—		—		—		13,048		8,730		147		21,925
Total	$	3,502,381	$	1,149,090	$	484,728	$	1,218,719	$	85,393	$	234,090	$	90,227	$	3,547	$	6,768,175



	December 31, 2016
	Multi-family		Commercial and Industrial		Commercial Real Estate Owner Occupied		Commercial Real Estate Non-Owner Occupied		Construction		Residential Real Estate		Manufactured Housing		Other Consumer		Total
(amounts in thousands)
Pass/Satisfactory	$	3,198,290	$	954,846	$	375,919	$	1,175,850	$	50,291	$	—	$	—	$	—	$	5,755,196
Special Mention	—		19,552		12,065		10,824		14,498		—		—		—		56,939
Substandard	16,709		14,313		5,648		7,041		—		—		—		—		43,711
Performing (1)	—		—		—		—		—		189,919		92,920		3,413		286,252
Non-performing (2)	—		—		—		—		—		3,583		8,810		70		12,463
Total	$	3,214,999	$	988,711	$	393,632	$	1,193,715	$	64,789	$	193,502	$	101,730	$	3,483	$	6,154,561


(1)	Includes consumer and other installment loans not subject to risk ratings.


(2)	Includes loans that are past due and still accruing interest and loans on non-accrual status.

Loan Purchases and Sales

During the year ended December 31, 2017, Customers purchased $174.2 million and $90.0 million of thirty-year fixed-rate residential mortgages with a purchase price of 98.5% and 101.0% of loans outstanding, respectively. There were no loan purchases during the year ended December 31, 2016.

During the year ended December 31, 2017, Customers sold $226.9 million of multi-family loans resulting in a gain on sale of $0.4 million, $191.6 million of consumer residential loans resulting in a gain of $0.2 million, one commercial and industrial loan of $3.9 million resulting in a gain of $0.1 million and $35.8 million of Small Business Administration ("SBA") loans resulting in a gain of $3.5 million. During the year ended December 31, 2016, Customers sold $33.3 million of SBA loans resulting in a gain of $3.7 million and a $5.7 million commercial loan resulting in a loss of $0.1 million.

None of the purchases and sales for the years ended December 31, 2017 and 2016, materially affected the credit profile of Customers’ related loan portfolio.

Loans Pledged as Collateral

At December 31, 2017 and 2016, Customers pledged eligible real estate loans of $5.5 billion and $4.8 billion, respectively, as collateral for potential borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB") and Federal Reserve Bank of Philadelphia ("FRB").